With the 2014 calendar year eclipsing the 1/2 way mark, the world financial markets including most asset classes, have oddly rallied in unison higher. This last occurred in 1993. Accordingly, if you maintain a balanced account which we always advocate at CRA, it most likely advanced in its entirety throughout the quarter, albeit a slow grind upward.
World Stock including Developed International and Emerging Market, the entire bond market, REITS, MLPs, and even commodities all have risen in 2014. The “melt up” reflects market resilience amid uneven US growth, and political and economic unrest in the Ukraine and the Middle East. Much of the market’s broad lift is attributable to sustained and continued efforts of the world’s central banks to a commitment of keeping interest rates low to ensure that their own economies continue their painfully slow recoveries, which in some cases began nearly five years ago.
The whiplash of the 10 year treasury has sharply turned the fortunes of the worst performing asset classes and sectors of 2013, many of which are interest rate sensitive. Accordingly, the sharp decline of the 10 Year treasury yield from 3% to 2.53% has most likely been the main driver of the 2nd quarter rally.
Equities Up!
Equity wise, international emerging markets were the best place to be in the second quarter, charting an advance of 5.64%. All major US domestic stock indices were also positive. Most notably, the S&P 500 advanced 4.69% while notching its sixth straight quarterly gain. The Russell 2000 small cap and DJIA indices lagged the broad market but still managed to eke out 1.7% and 2.24% gains respectively.
Alternatives Up!
Gold, REITS and MLPs all saw price increases during the 2nd Quarter. The Alerian MLP index advanced 10.91% and is plus 13.36% year to date. Gold finished the quarter at $1,321.80 per ounce or roughly 3.00% higher than the closing price the first quarter. Gold prices have now rebounded by nearly 10% from the end of 2013 ($1,202.30). The MSCI REIT Index advanced 5.56% during the quarter and is 14.78% to the good thus far in 2014.Crude oil ended the quarter at $105.37 per barrel. It began the year at $98.50.
Bonds Up!
Falling bond yields may have been at least partially responsible for the advance of alternative investments in 2014, as investors have sought out higher returns than what is being offered in the bond market. The 10 year treasury which started the year at 3.02% yield ended the quarter with a yield of 2.53%, and now stands nearly unchanged from one year ago (2.54%). Consequently, the US aggregate Bond market is positive 3.92% year to date. The municipal bond market stabilized from a dismal 2013 and advanced by 6% thus far in 2014, of which 2.58% came in the latest quarter.
Run on the Bank?
Blackrock the world’s biggest money manager is now asking regulators to scrutinize the risk of investor flight from bond mutual funds in an effort to seek protection should interest rates begin to rise again. They also are asking the Fed to consider potential restrictions that would help prevent or at least curtail asset sales. As now-former Fed Governor Jeremy Stein recently aptly summarized, “bond mutual funds currently give people a liquid claim on an illiquid asset.”
Along the same lines, The Federal Reserve is currently exploring the possibility of designating certain asset managers such as Fidelity and Blackrock as systemically important; a designation that they do not necessarily want, since they are not banks, and would most certainly scoff at the additional regulation that would occur if such a labeling is ultimately made. Nevertheless, these developments could have far reaching consequences and bears watching. At minimum, a review of your current fixed income holdings including your exposure to now probable rate increases is certainly warranted under these circumstances.
CRA is undertaking an ambitious building project that will move us from the “back of the house”. We hope to be able to deliver a more “client friendly” space to better serve you, our valued clients and, at the same time, reward our own team with nicer digs. Whether better parking accommodations, an improved lobby configuration or state of the art technology and meeting rooms, our goal is to improve your overall client experience. We are planning the transformation to be completed during the third quarter. So we definitely have full plates this summer.
During the 2nd quarter world financial markets showed resiliency with a quiet march forward towards new highs. Accordingly, this may be the perfect time to reassess your own portfolio and evaluate your current exposure should volatility return or the market experiences draw down.
Thank you for your business and the trust you have placed in our team. Now hit the beach!
Respectfully submitted,